Economy Report

Moving Beyond Mono-economies in Nigeria, Africa

Since the global fluctuations began in the international demand and prices of crude oil and some natural resources in recent years, there has been an increasing need for viable economic diversification and less dependence on oil in Nigeria and on the African continent.

While some African countries have diversified for greater revenue and benefits, others are slowly departing from a monolithic economy to embracing the gains of diversification. Abimbola Akosile writes

For those African countries which have for long depended solely on the proceeds of crude oil exportation, these are trying times. Caught in the web of fluctuations in crude oil prices, such nations are reeling from inflation, economic recession, with attendant negative impacts on their development processes.
While some oil-rich African nations like Nigeria, Libya, Gabon, Angola, Algeria, Sudan, Egypt, Equatorial Guinea, Democratic Republic of Congo and now Ghana are rallying against fluctuations in the prices of crude oil exports, other countries like Morocco, Ethiopia, South Africa, Tunisia and Mauritius have diversified their economies in tandem with modern trends and are enjoying the benefits thereof.
Even Nigeria, which was rebased as the largest economy in Africa in April 2014, when the price of crude oil rose above $100 per barrel under former President Goodluck Jonathan, is now facing near-recession, with the Federal Government – presently under President Muhammadu Buhari – frantically seeking alternative sources of revenue beyond crude exports and agriculture.

The global financial and economic crises exposed one of the major weaknesses of a number of African economies: their dependence on too few export commodities and one or two sectors. Such dependence makes many countries vulnerable to fluctuations in commodity prices, demand and extreme weather events such as droughts and floods.
A recent study looked at how African governments can diversify their economies and analysed five countries‟ economic diversification profiles in particular. It examined some of the major determinants of diversification and also looked at how the private sector plays a key role by being at the forefront of innovation, research and development and production.
The study noted that good governance is needed to create an enabling environment for investment and trade; to manage natural resources; and to set policies to develop strategic sectors. A regional approach to economic diversification is particularly important, especially given the small size of African economies and the benefits of economies of scale from regional initiatives.
New economic partnerships, including South-South co-operation and relations, offer Africa the opportunity to expand its economic options. Lastly, infrastructure and human resources help to facilitate trade, productivity and innovation and are key drivers of diversification, the study noted.
This report looks at the Nigeria economic diversification scenario and how some other African countries have tried to move away from dependence on oil proceeds, to generate alternative revenue to ensure development of their populations.

Nigeria: Breaking the Shackles of Oil Dependence

In August 2015, President Muhammadu Buhari reaffirmed his administration’s commitment to faster development of non-oil sectors and the speedy diversification of the country’s economy. He made this known at an audience with the new ambassador of Saudi Arabia to Nigeria, Fahad Sefyan, at the presidential villa, Abuja.

According to him, for more than 30 years, Nigeria depended on oil as its major source of revenue at the expense of agriculture and the non-oil sector which could be the mainstay of its economy. He said his administration would work closely with other countries facing the challenge of falling oil prices to rapidly move away from dependence on crude oil exports for economic survival.

Buhari said in keeping with his commitment to the accelerated development of non-oil sector, the Federal Government would ensure that all pending agreements on trade and economic relations with other countries are speedily concluded and signed.
In a detailed analysis titled ‘Between oil and diversification of economy’ Mr. Olugbenga Salami on July 12, 2015, he examined the adverse effects Nigeria continues to suffer from dwindling revenue from crude oil and gas sector, which accounts for about 95 per cent of the nation’s revenue, after the neglect of other major sectors over the years.
Salami, who examined the government’s new efforts to diversify the nation’s economy, noted that for many years, since the discovery of oil in Nigeria, various administrations have been relying on the product, at the expense of other natural resources.
To him, agriculture, which was the mainstay of the nation’s economy before the discovery of oil in Oloibiri, Bayelsa State in 1956, was relegated to the background, and it failed to regain its lost glory despite several programmes initiated by some of the past leaders.
The agricultural programmes included the “Operation Feed the Nation” by the General Olusegun Obasanjo in late 70s, and “Green Revolution” by Alhaji Shehu Shagari in early 80s before former President Goodluck Jonathan introduced the Agriculture Transformation Agenda (ATA) which made a lot of impact in the sector.
However, Nigeria is now paying for the long neglect of other sectors, especially agriculture, manufacturing and other productive sectors, and presently suffering the adverse effects of the dwindling revenue from crude oil and gas sector, which today accounts for over 90 per cent of its revenue.
Crude oil has contributed substantially to Nigeria’s revenue since 1956 and more especially, since 1970 when its price was on the upward trend. But for a country to attain growth and development, its economy has to be diversified. Diversification does not occur in a vacuum. Mono-economy needs to give way to the productive development of various sectors of the economy.
Following the supply and demand limitation of major importers from the country, which led to the fall in the price of oil since June 2014 when it was $115 a barrel, to the present prices of around $50, Nigeria’s continuous huge earnings or revenue from this sector has been acutely minimised. There is an urgent need for the Nigerian government to begin looking into diversification of various sectors of the economy so as to attain solid economic growth.
The fall in price of crude at the world market led to increased inflation and the devaluation of the Naira. The manufacturing and other productive sectors are worst hit because in a highly import dependent country like Nigeria, it is extremely difficult to bring in raw materials, and the dollar is expensive to procure at the interbank window and the black market.
The perennial crash of crude oil prices and the exposure of the Nigerian economy to financial crisis have pushed stakeholders and policy makers’ attention to non-oil revenue generation.
One sustainable source of foreign exchange generation is export of manufactures, solid minerals, and agricultural output with value addition. The Nigerian Export Import Bank (NEXIM) is fast becoming the center of attraction to government and exporters to push the non-oil foreign exchange earning drive through trade financing and productive efforts of exportable products from Nigeria.
According to government official documents, in no other sector is the role of NEXIM in driving the foreign exchange revenue drive of the present administration more pronounced than in encouraging the manufacturing, mining and the agricultural sectors in producing non-oil goods for export.
This way, the government reasons that the volume of external trade is being gradually shifted away from crude oil on which the nation largely depends, to non-oil items that are widespread in the country, but which have largely suffered neglect due to a multiplicity of factors, chief of which is funding.
The new focus is intended to range from housing, industry, energy, entertainment and the whole gamut of every facet of the nation’s social life.
Oil is the lifeblood of Nigeria’s $588 billion economy. Pumping more than 2.5 million barrels of oil a day makes the country the continent’s largest producer, although the recent activities of militants in the oil-rich Niger Delta region have drastically reduced the daily output to less than 2 million barrels per day.

Oil constitutes 80 per cent of revenue and 95 per cent of export earnings, according to statistics from the Federal Ministry of Finance. This can be a blessing or a curse: it provides a large revenue stream in good times but also puts the country at the mercy of cyclical prices. A drop in oil prices has the potential of leaving government with the choice between spending cuts impacting public infrastructure or a damaging deficit.
The good news is that by investing energy profits in projects in the downstream oil sector and manufacturing, it is possible to diversify sources of revenue and break oil’s dominance of the economy.
More importantly, investing in strong and successful manufacturing industries stops Nigeria from exporting valuable resources overseas when they can be turned into something more precious at home while providing jobs for Nigerians at the same time – multiplying the benefit to the national economy.
Nigeria’s natural resources are not limited to minerals. By adopting a development model that capitalises on all of Nigeria’s assets and vast energy reserves, a large labour force, and a huge local customer base, the country can be self-sufficient and prosperous.

A Better Africa
At the recent World Economic Forum-Africa in Abuja, former Minister of Industry, Trade and Investment, Dr. Olusegun Aganga, said Africa must embrace industry in order to manufacture products with greater value than the raw materials used to produce them. He said no country has ever moved out of poverty without making this important step.
Former President Jonathan said at the WEF that even though manufacturing can create more jobs than the service sector, the Nigerian economy is still dominated by service jobs. He believes that the growth of manufacturing has greater potential to create employment opportunities than the country’s growing GDP, and the same process can be extended to Africa as a whole.
The federal government made a good use of the World Economic Forum-Africa to show the lucrative possibilities of investing in the country, to enhance ties with trading nations, and to find new partners for growth.
It is crucial that Nigeria adopts a strategy targeted at all sectors of its vast population that will build a diverse industrial base, increase the value of its natural resources, and protect the national economy from the price fluctuations of a single natural resource.
Emerging Countries of Africa
Seventeen emerging African countries – home to more than 300 million people – have undergone dramatic changes in economic growth, poverty reduction, and political accountability since the mid-1990s. Another six “threshold” countries have seen promising but less dramatic change (see map).
The transformation in these countries has been little noticed by the outside world and is too often overshadowed by negative news from other African countries. But the break from the past is clear.
Consider the economic turnaround in the 17 emerging countries: between 1975 and 1995, their economic growth per capita was essentially zero. But between 1996 and 2008, they achieved growth averaging 3.2 percent a year per capita, equivalent to overall GDP growth exceeding 5 percent a year. That growth has powered a full 50 percent increase in average incomes in just 13 years (see figure 1).
It’s not just growth: trade and investment have doubled, school enrollments are rising, and health indicators are improving. The share of people living in poverty has declined from 59 percent to 48 percent. Democracy, while still flawed, has become the norm rather than the exception.

Governance has slowly but steadily improved. To be sure, these countries are far from perfect. They face many challenges, and their continued success is far from certain. But deep changes are taking place in the emerging countries, and their future prospects look bright.

Five Fundamental Changes
The turnaround in emerging Africa is neither temporary nor simply the result of favorable commodity prices. The revival persisted through the global recession of the late 1990s, and these countries weathered the 2009 global economic crisis better than most developing countries. Something deeper is at work.
Emerging Africa points to five fundamental changes underway in these countries. The first two ignited the turnaround in the 1990s and helped sustain it over time; the next three took hold later and are helping sustain progress.

1. More Accountable Governments
Africa’s troubles have been, in large part, a failure of leadership. Too many leaders have ruled by intimidation, violence, and brute force. But in the 1980s, many authoritarian governments lost their legitimacy and the economic and financial resources to maintain control. Protestors began to call for change, and governments lost the backing of key supporters.
With the end of the Cold War and apartheid in the early 1990s, authoritarian leaders were forced to give way to democratic governments. The number of democracies in sub-Saharan Africa jumped from just 3 in 1989 to 23 in 2008, including most of the 17 emerging countries.
Democracy means not only elections but greater adherence to basic political and civil rights, more freedom of the press, and stronger political institutions. Not all of the emerging countries are democracies, but there has been a clear shift toward greater political accountability and improved governance more broadly. Democratic progress has been uneven and remains incomplete, but it has been – and will continue to be – at the core of emerging Africa’s renaissance.

2. More Sensible Economic Policies
Twenty years ago, nearly all African economies were effectively bankrupt, with large budget deficits, double-digit inflation, growing debt burdens, thriving black markets, shortages of basic commodities, and rising poverty. Economic mismanagement and the heavy hand of the state scared off investors, provoked capital flight, and led to stagnation and rising poverty.
In the late 1980s, the emerging countries began to implement much stronger economic policies. Today, black markets are but a distant memory. Budget and trade deficits are more sustainable. The role of the state is smaller, the business environment is friendlier, and trade and investment barriers are lower.

3. End of the Debt Crisis
The 1980s debt crisis hit Africa particularly hard. Stagnant economies and heavy borrowing created huge debt burdens. As the crisis deepened, the International Monetary Fund (IMF) took on a much more prominent role, and IMF-World Bank “stabilisation and structural adjustment” programmes became central to economic policymaking and the relationship between African countries and the donor community.
Some middle-income countries began to resolve their debt problems in the early 1990s, but it took another decade or more for low-income countries to get out from under their debt burdens through the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Of the 40 countries eligible for the HIPC programme, 36 have received at least the first stage of HIPC debt relief.
Today, the debt crisis is finally winding down. Debt burdens are significantly lower, freeing up financial resources and relieving the time burden on senior policymakers. But perhaps even more important, relationships with donors have become much healthier. Country-led Poverty Reduction Strategies have replaced structural adjustment programmes at the centre of policymaking, providing a stronger basis for donor support to bolster future development going forward.

4. New Technologies for New Opportunities
Cell phones are becoming ubiquitous across Africa, and Internet access is growing quickly. In the most remote corners of the countryside, cell phones are relaying information on prices and shipments of goods in real time and facilitating the transfer of funds with simple text messages.
The Internet is opening new economic opportunities and creating jobs that did not exist before, such as data entry and other services. And both are widening political involvement by enabling the debate and flow of information that are the backbone of political accountability and transparency.

5. New Policymakers, Activists, and Business Leaders
A new generation of savvy, sharp, and entrepreneurial leaders is emerging across Africa. They are rising through the ranks of government, starting up businesses, working as local representatives of multinational corporations, leading local NGOs and activist groups, and taking an increasing role in political leadership.
They are fed up with the unaccountable governments and economic stagnation of the past and are bringing new ideas and new vision, often fortified by travel abroad and a globalised outlook. With the new generation at the helm, Africa’s future looks increasingly bright.

The Road Ahead
The five changes described above provide the foundation for continued success in the emerging countries, but the turnaround is young and remains fragile. The emerging countries face several challenges, including the need to deepen democracy and strengthen governance, diversify their economies to create new economic opportunities for a growing workforce, manage the role of China to ensure that the benefits outweigh the risks, adapt to the effects of climate change, and build strong education and health systems.
Unleashing the power of girls and women will be central to maximizing the speed, equity, and sustainability of development. Meeting these challenges will not be easy; it will require difficult choices, effective leadership, and hard work by the citizens of the emerging countries.
Africa’s emerging countries will undoubtedly face challenges, but they have shown that nations once considered failures can turn around and climb out of poverty. The renaissance in emerging Africa provides hope for some of the most challenged countries in the world that it is possible to combat poverty, secure peace, increase prosperity, and widen the global circle of development.

Emerging Africa Source: Centre for Global Development
Foresight Africa: Top Priorities for the Continent in 2014…Report
Foresight Africa: Top Priorities for the Continent in 2013: Brookings Institution Press © 2016 The Brookings Institution
Source: Economic Diversification in Africa: A Review of Selected Countries
Steven Radelet September 2010
Source: Nigerian Pilot

Source: NAN and AfricanSpotlight website

Rowing Against the Current: The Diversification Challenge in Africa’s Resource-Rich Economies, by John Page Distinguished Visiting Fellow, Global Economy and Development December 2008
SERIES: Global Working Papers | No. 28
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